Groupon Fails?

It's a real swine when you get something right like a prediction for 2012 but I only made my observations about a  month ago and already it seems one has partially come true. Groupon has suffered a major set back and concerns about its business model are now getting serious. I predicted that Groupon would fail in 2012 and the news of a 46% drop in gross revenue in the lead up to Christmas and after Thanksgiving is a huge warning bell.

Like my blog over Christmas about the massive drop off in social networking activity at family holiday time, it seems that Groupon suffered from the same effect. Retailers in the UK, in the meantime, had strong a Christmas period rescuing a mediocre year with John Lewis reporting bumper sales. So it is not that we have suddenly gone off bargains, there is a real smack of traditionalism at this time of year. TV advertising and viewing peaks, social media goes down. Retailers have strong offers, voucher schemes suffer.

There is not an obvious correlation here and this must be worrying to Groupon's investors. Interestingly, Groupon's travel business continued to perform strongly so this is its core business that is creaking. We should also remember that this is a week's data we are looking at but it is a huge drop by any standards, so the full Christmas picture has not emerged.

But I have my suspicions. If 'social' type interactions decrease sharply during traditional family holiday periods (i.e. whole nations are not working at once) then it seems that Groupon also suffers. This would sort of suggest (anecdotally and not backed with real evidence) that most of the Groupon transactions are being done in working hours by people at work. This is once again a worry for investors in social networking companies. If businesses really get wise to this then I believe that social networking will get suppressed by companies during working hours. And if Groupon really does correlate to social networking, then its model could be at similar risk - given its offers are very transitory.

Whatever the root cause here, it seems that not all is well thought through in the business model. I have highlighted in the past that Groupon is a business of the period (we are in austere times), that it attracts 'discount junkies' and not long term customers, that retailers are not thinking offers through properly and that it is wide open to competition not just from like-minded businesses but from traditional retail. 

The final point here is that I think investors have got deceived by the vanity of the gross sales line. Even collapsing sales by 46% in a week meant that Groupon grossed $26.7million. But this revenue is split with the retailer and then you have the cost of customer acquisition and operating costs to deduct from the residual. There is no doubt that Groupon loses more money the more it sells. Many high growth firms consume cash and lose money heavily in the early stages, but at least those businesses make a good margin per transaction which clearly shows the future profits can overcome the past losses. But Groupon loses money heavily on every transaction and it is not clear when that can end if it takes pastings of this nature in a single week.

I stand by my prediction and this sales drop is evidence that the model invented was wishful thinking. It means that the IPO was vastly over called and investors really should be worried about the future of this business in its current form. In my humble opinion, of course.

The Internet Bubble Expands Again

I like to see what I am getting before I buy when it comes to groceries but I must admit you cannot beat the sheer convenience of online grocery purchases once in a while.

Like most people, my wife and I will sit down and do an online supermarket shop sporadically. We mainly use Tescos but once in a while we use Ocado because we like the Waitrose brand. Either way we always marvel at how little we have bought, how much of the same thing has arrived, how many items differ to the brand we asked for and the staggering price of so few goods. We often remark that we could have got a good trolley load for far less and ask ourselves where has the money actually gone when we online shop for groceries.

Such questions are more evident when we use Ocado. Focusing on the Waitrose brand, which itself is reassuringly damn expensive, the quality is a good deal higher than Tescos, we convince ourselves. Certainly, the meat and fish products are but often the cold meats and tidbits are nicer too. However, for the most part, the popular brands are the same across the board. But when the Ocado delivery arrives, a few bags seem to have cost an absolute fortune.

So I was surprised when I read yesterday that Al Gore's special 'green fund', Generation Investment Management, is part of a group of investors who have injected around £30m into Ocado, the rest has been stumped up by Fidelity Investments and the shareholders, of which the John Lewis Pension Fund is a large one. The fact is that over the years, Ocado has raised more than £350m and has around £100m in debt, much provided by Lloyds Banking Group. In response, Ocado's sales will be £450m this year and that is reckoned to be a whacking 20% of the online supermarket sector - which analysts expect to grow to £40bn over time. To date, Ocado has not made single penny in net profit and even this year its projections are for operating profit only. Similar outlooks abound for future years as it focuses on building market share before making profits.

Growth is beautiful, and focus on the topline.

Is it me, or is that the internet mantra all over again? You cannot beat grabbing market share in a growing market but reality sets in over time. Ocado may have 20% of the online grocery business today but that does not reflect its true market share in the grocery sector as a whole. Unless it changes its value proposition in terms of what it offers, as this market grows it will tend toward its natural market share, in my humble opinion. That, in time, might still make it some money. But Waitrose has a different bunch of investors or partners to answer to and this makes its narrow, high value shopping a brand itself and the partners like it. But in the cruel world of online retailing, cost may become the key as one of the greatest features of online shopping is the ability to compare prices over a range of shops - item for item. Today this is limited to insurance, travel or electronic goods largely but sites like moneymarkets.com and gocompare.com have a principle and model which is easily repeatable for a range of goods. So if you know what you like in terms of brands, in time, you should be able to easily compare which store is offering the best deals for your shopping trolley before you pay.

If all the clever advertising by Asda, Sainsbury and Tesco is anything to go by, then the online world of supermarkets will get very different in the future and competition will get vicious and cut throat. I believe Ocado is not particularly well positioned and I would focus on getting some money flowing in for the right reasons rather than for speculation. After all, we have seen this all before.

The internet boom is coming to the supermarket world. Pat your virtual bums and start shopping around.